What is a credit card and how does it work?
Although a credit card looks like a debit card, it is very different. Rather than using it to access your own money, a credit card allows you to borrow money from a bank or financial institution. You can then use the credit on a credit card to make purchases, cash withdrawals or balance transfers. . By having a credit card you agree to pay any funds you spend back, usually with interest.
The amount of credit you’re given all depends on the type of card you’re applying for, and your circumstances. When you use a credit card to make payments, you will accrue interest on the money you borrow. Depending on the credit card and type of transactions you make, you may not pay any interest if you pay off the full amount you borrow each month.
Each month you will be provided with a statement (normally every 30 days), showing the transactions you’ve made and the money you’ve borrowed to date. It will also outline the minimum repayment you’ll need to make against what you’ve borrowed, and the amount of interest that has been applied that month.. You can either make the minimum repayment towards your balance, repay the full balance or pay any amount in between. It will take you longer and cost you more to clear your balance if you only make the minimum payment each month. You can also set up a direct debit to make sure you don’t miss a payment.
Repaying your balance in full each month is the ideal way to manage your credit card.
What is the eligibility criteria?
When applying for a credit card, make sure you check your eligibility for the credit card you want. While credit card provider’s eligibility criteria may vary, they often look at your age, earnings, income, financial history, credit score, and other regular repayments you may be making to decide whether you qualify for their credit card. As well as your eligibility, these factors will also determine the amount of credit you’re able to borrow and the rate of interest you’re offered on the card you are applying for.
It’s important to remember that every time you apply for a credit card, it will show a search has been undertaken on your credit report. The providers perform a credit check to assess your credit history to decide whether they’ll accept your application. If you make several applications within a short time, this may temporarily affect your ability to get credit.
Ways to use a Credit card
When applying for a credit card, you are agreeing to pay back any money that you borrow from a bank or financial institution. It’s important that you only borrow what you can afford, and that you’re fully aware of any associated costs of borrowing that money.
If you’re considering making a credit card application, take a look below at some of the benefits you can expect from using a credit card, as well as the watch outs.
- You can spread out the cost of purchases over time – if you make a large purchase, or multiple purchases one month, you can pay using your credit card then repay the balance over a number of months. However interest is usually charged on purchases so the longer you take to pay off the full amount, the more it will cost overall.
- You can use a credit card for emergencies – if you don’t have a large pot of savings and worry that you may not be able to cover the costs if something were to go wrong, like a boiler needing to be fixed or replaced, you could pay for it with your credit card.
- You can take advantage of 0% interest – some credit cards, such as a balance transfer 0% credit card , offer an interest free period on purchases.
- You can use a credit card to reduce your borrowing – if you transfer your debt to a balance transfer 0% credit card will give you an opportunity to pay off that debt, interest free, during the 0% interest period. You’ll usually have to pay a balance transfer fee to benefit from a 0% interest period and most providers won’t let you transfer a balance from any other credit card you have with them.
- Your purchases on credit cards are protected – Under the Consumer Credit Act you may benefit from extra protection on credit card purchases over £100 and up to £30,000. This means that you may be entitled to a refund if something goes wrong - even if you've just paid a deposit. The same applies if the company you’ve bought from stops trading before the item is delivered or the service is provided.
- You can use a credit card for making car and hotel reservations – car rental companies and hotels typically place a hold on your account for security deposits. A credit card is useful to use in these circumstances so that money in your bank account is not tied up.
- You can earn reward points on your purchases – some credit card providers’ offer rewards like cash back on any purchases you make using them, which can be redeemed later on for things you were going to purchase.
Credit card watch outs
- You could be hit with unexpected interest, fees and charges – if you don’t familiarise yourself with the interest, fees and charges of your credit card you could be charged a fee, such as when you miss or are late with a payment, or if you exceed your credit limit.
- Charges for making cash withdrawals – credit cards are best used to make purchases. If you use it to withdraw cash, you may face higher rates of interest and a fee on the amount you withdraw. Some credit providers allow you to use a Money Transfer to transfer money directly into your bank account.
- Making a minimum payment won’t clear your borrowing – if you only pay the minimum each month, you’ll have to pay interest on the remaining balance. This means you have to pay more interest and it will take you longer to clear your balance. Depending on the credit card you choose, this interest rate may be higher than a personal loan.
- A credit card could lead to more debt – although credit cards provide you with access to funds, if a change in your circumstances means that you can no longer make repayments, the interest and fees will start to accumulate.
- A credit card could have an impact on your credit score – if a change in your circumstances means that you can no longer make repayments, this could have an impact on your credit score and make it harder to apply for credit in the future.
Thinking of getting a credit card?
If you’re thinking of getting your first credit card, take a look at our current range of credit card products. Here at The Co-operative Bank, we pride ourselves in being driven by something different than our competitors. We take an ethical approach to banking, founded in a customer-led Ethical Policy that has been over 25 years in the making, shaped by over 320,000 customer responses.
Applications are subject to status and terms and conditions apply. The Co-operative Bank reserves the right to decline or accept any application.